Dollar – Finally a Good Jobs Number

Before this morning’s labor market numbers were released, many Fed officials including Dudley and Yellen pledged to continue to taper, saying it would take a significant change in the economic outlook to veer the central bank off its course. With non-farm payrolls rising 175k in the month of February, up from 129k, there’s no question that the Fed will taper by another $10 billion this month but they also have more flexibility now to change forward guidance. Although the unemployment rate increased, investors bought dollars aggressively on the back of the release because 60k people re-entered the workforce. Average hourly earnings also rose 0.4%, the strongest pace of growth in 8 months. The broader U-6 unemployment rate dropped to 12.6% from 12.7%, its lowest level since November 2008. If not for inclement weather, which made it difficult for 600k people to get to work, the non-farm payrolls report would have been even stronger. We are now looking at a potentially significant increase in March payrolls as long as jobless claims remain low.

As shown in the price action of USD/JPY, today’s report is a good number for the U.S. dollar. In the Beige Book, the Fed said the economy grew over the past month even as harsh weather slowed hiring. With today’s release, concerns about the slowdown will ease paving way for a stronger dollar rally ahead of the March 19th FOMC announcement. Today’s number is a big relief for the central bank whose optimism about the economic outlook came into question with every piece of disappointing data. Janet Yellen’s decision to continue reducing purchases will now receive more support than skepticism. The central bank is widely expected to drop its 6.5% unemployment rate threshold this month and adopt qualitative guidance. Barring a negative retail sales report next week, we expect USD/JPY to quietly trickle higher towards 105. EUR/USD on the other hand should find a new trading range between 1.3750 and 1.39. While this month’s NFP report and 7bp increase in the 10 year yield assures that Fed policy will lead ECB policy, the recent optimism from ECB President Draghi will limit the downside for EUR/USD.

Up North, disappointing Canadian employment numbers drove USD/CAD sharply higher. A total of 7k jobs were lost in Canada last month, which is significantly worse than the market’s 15k expectation. Although full time employment increased, the return to job losses will leave the Bank of Canada cautious. Combined with the recent sell-off in oil prices, USD/CAD could extend higher.

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